Technology

Waiting for the Accelerator Bubble to Pop

Paul Graham of Y Combinator and Charlie Rose talk during TechCrunch Disrupt New York in 2011

Since Paul Graham launched Y Combinator in 2005, the field of startup incubators and accelerators has exploded in the U.S. and overseas, with new entries emerging in all manner of oddball shapes and sizes, from a 80,000-square-foot space in San Jose, Calif., dedicated to tech companies hoping to do business in China, to a program that offers entrepreneurs cash to develop their business in Chile.

There are accelerators for green tech, health tech, ed tech, the cloud, and every other tech flavor du jour, and accelerators everywhere from Baton Rouge to Durham, N.H., as cities across the country lay claim to the title of the Silicon Valley of [insert industry here].

There’s Unreasonable at Sea, a 100-day program on an ocean liner, which encourages entrepreneurs to “combat the greatest challenges of our time” while sailing among ports in 13 countries. There’s Brad Feld, TechStars co-founder and Foundry Group managing director, who bought a three-bedroom house in Kansas City and is using it to launch a co-working space that sounds a little bit like MTV’s The Real World meets Google Fiber.

There’s even a startup incubator housed in California’s San Quentin State Prison, though to be fair, the program’s founder, venture capitalist Chris Redlitz, told Reuters that the jailhouse incubator isn’t a play to develop investment ideas as much as a means to teach entrepreneurial skills.

It’s enough to make you wonder, with apologies to the folks at San Quentin, whether accelerators are the cutting edge in launching innovative businesses or something more resembling college study abroad: a transformational experience for a few, an extended jaunt for the rest.

Accelerator programs, as typically defined, make a small equity investment in the companies they accept and offer space and mentoring to entrepreneurs over the course of several months. (Business incubators, which have been around for decades, generally provide space as well as business services and give companies more time to hatch, though according to Jasper Welch, chief executive of the National Business Incubation Association, the line between accelerators and incubators is blurring.)

As accelerators have become an increasingly popular way to scatter seed funding among a large number of companies, critics have noted two key developments: Companies of lesser promise are gaining acceptance, and often funding, and the quality of mentoring in the programs has decreased.

When David Tisch, former managing director of TechStars’ New York City accelerator, stepped down from his role with the program, he complained in an interview that “the majority of accelerators are not good for companies.”

The result is that venture capitalists have begun to predict that accelerators are going to fail. “If we get out of 2013 without some noteworthy contraction, I’d just be gobsmacked,” says Paul Kedrosky, an early-stage investor and senior fellow at the Kauffman Foundation.

There are already signs of paring back. In December, Y Combinator’s Graham wrote about his accelerator’s decision to reduce its class size, from 84 companies in the summer 2012 class to less than 50 in the current session. When 500 Startups, an elite Silicon Valley accelerator, announced plans to move into the New York market at the beginning of the year, it decided that the city didn’t need another accelerator and opted to open a co-working space instead.

The contraction hasn’t been universal. TechStars, one of the accelerators that Kedrosky ranks among the best, launched three new programs—one in London, one in Chicago, and one focusing just on education technology in New York—in the first two months of this year. And there isn’t enough academic research on accelerators to judge the value of the programs, says Dane Stangler, the acting director of research and policy at the Kauffman Foundation. (Stangler does say that there’s “significant research on incubators, and the weight of it isn’t positive.”)

One study, conducted by Houston’s VC Aziz Gilani last year, showed that only two accelerators—Y Combinator and TechStars—had produced meaningful exits for company founders. Forty-five percent of the programs he included failed to produce a single graduate who raised venture funding. That squares with Kedrosky’s investing approach to accelerator companies: “If they’ve gone through a top program, it’s interesting,” he says. “If it’s not one of the top ones, it just tells me you’re alive.”

Meanwhile, the ongoing Series A crunch means that accelerator companies are fighting for less venture funding. And, to revisit the study abroad analogy, it’s easy to wonder whether more companies would be better served by skipping the entrepreneurial equivalent of chaperoned semester in Europe and setting out on their own to explore the world.